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6662(b)(6) and 6662(i) has changed,
The Service has removed the requirement taxpayers that can demonstrate that
the transaction at issue complies
that examiners follow the four-step process, with congressional intent may still
including obtaining executive-level approval be afforded some protection from
by the examiner’s territory manager and the the imposition of a penalty under
the economic substance doctrine.
director of field operations. ■ While the Service has concluded
that the four-step process, including
DFO approval, is no longer needed,
the economic substance doctrine may either a primary or alternative posi- taxpayers should be mindful that
be appropriate, much like the former tion based on the facts and circum- newer examiners and Counsel team
guidance for Step 2. stances of the case. members with less experience in
While the memorandum states that applying the economic substance
“the changes set forth herein align this This guidance is directly contra- doctrine may require additional
penalty with other assessable penal- dictory to the inquiries previously information and documentation.
ties which do not require executive required in Step 3 of IRM Section From Regina Clark, J.D., Washington,
approval,” no “assessable penalties” are 4.46.4-4, which demonstrated a prefer- D.C., and Gloria Sullivan, San Francisco
discussed, and no distinction is made ence for applying other judicial doc-
between penalties for which reason- trines or recharacterizing a transaction
able cause may be asserted and the where appropriate rather than applying Practice & Procedures
strict-liability penalty imposed by Secs. the economic substance doctrine.
6662(b)(6) and 6662(i). LB&I senior officials have con- Chief Counsel memo
In another departure from previous firmed that examiners are free to look clarifies the assessment
guidance, Attachment 1 to the April at all legal arguments and all facts and period in multiyear Sec. 332
2022 memorandum provides that other circumstances when deciding whether liquidations
judicial doctrines can be considered to impose a penalty under the econom- An IRS Chief Counsel Memorandum
in addition to the economic substance ic substance doctrine and that there is (AM 2022-002, released Sept. 2, 2022)
doctrine, stating: no longer a list of transactions that are concluded that the IRS should not rely
“safe.” The only carve-out mirrors pre- only on the Form 952, Consent to Ex-
The economic substance doctrine vious guidance regarding transactions tend the Time to Assess Tax Under Section
may be applied in addition to other that are consistent with congressional 332(b), when determining the assess-
judicial doctrines (e.g., substance intent, stating: ment statute expiration date (ASED)
over form or step transaction) under Sec. 6501 for a multiyear Sec.
either as a primary argument or Notwithstanding existence of the 332 liquidation. Instead, the memo in-
as an alternative position to those above facts and circumstances, the structs the IRS to thoroughly review all
judicial doctrines depending on economic substance doctrine may the information filed by the parent and
the facts and circumstances of the not be appropriate if the transaction subsidiary to identify the tax year in
case. Likewise, if recharacterizing that generates targeted tax incen- which the first distribution was made.
a transaction (e.g., recharacterizing tives is, in form and substance, con- Given the implications for failing to
debt as equity, recharacterizing sistent with Congressional intent in properly file a Form 952, practitioners
someone as an agent of another, providing the incentives. should be aware of the specific require-
recharacterizing a partnership ments laid out in the memo.
interest as another kind of interest, Practical tips
or recharacterizing a collection of ■ Documentation of the economic Sec. 332 liquidations
financial products as another kind substance and business purpose of Under Sec. 332, certain liquidations
of interest) addresses the noncom- a transaction and any key steps in are nontaxable events such that the
pliance that is being examined, the transaction that produce a tax parent recognizes neither gain nor
then recharacterization should be benefit is especially important. loss if (1) the parent corporation
applied and the economic substance ■ While the process for an exam- owns 80% or more of a subsidiary;
doctrine may be considered as iner to assess a penalty under Secs. (2) the parent receives, or is deemed

www.thetaxadviser.com January 2023 37